RBI takes further step to stem rupee's slide against USD

Saikat Das
moneycontrol.com

As expected the Reserve Bank of India (RBI) further curbed the availibility of funds (liquidity) in the markets to stem the rupee's free fall against the US dollar. The central bank will now auction the government of India cash management bills (CMBs) to raise Rs 22,000 crore on every Monday.

What is Cash Management Bill (CMB)?

It is a kind of short-term debt market instrument, which can be issued by the Union government on ad hoc basis for maturities of less than 91 days. The only difference between treasury bills and CMBs is maturities. T-bills can be upto one year.

For the last couple of weeks, the RBI has been conducting auctions of CMBs. Last Monday itself, it mopped up Rs 3,000 crore through seven-day-CMB with a cut-off yield at 9.926 percent.

"Over the last two months, RBI has instituted several measures to contain the volatility in the foreign exchange market. On a review of the impact of these measures and for effective liquidity management, it has been decided that the RBI will auction Government of India CMBs for a notified amount of Rs 22,000 crore once every week on Mondays," the Apex bank said in a release on Thursday.

Also read: Super regulator panel raises concern on bank credit quality

First auction on August 12

Next Monday, RBI will sell CMBs of 35 and 34 days, maturing on September 17, 2013. The notified amount is Rs 11,000 crore each issue.

How will it work?

RBI wants to suck out excess liquidity from the banking system. This will help stop speculative trading in the currency market. Speculators are not likely to play their game borrowing money from banks. Cash flows will be limited after this CMB move, traders said.

"It will definitely impact the exchange rate and drive the rupee to rise above 60," Moses Harding, the executive director - Lakshmi Vilas Bank told moneycontrol.com.

"The move will discourage forward import covers while encouraging the same for export covers. The central bank wants to keep short term rates elevated. If sovereign instruments give higher rates, other short term papers will be subscribed at a minimum premium of 50 basis points over and above that. Banks are already paying 10.25 percent in MSF," he said.

It is widely alleged that many importers are buying dollars to book long term forwards. They are clung to idea that the US dollar will rise further against the rupee. This speculative nature collectively aggravating the rupee slide against the US dollar. A contraction of fund flows will squeeze this practice.

Impact….

Next Monday, the CMB cut-off yields are expected to be around 11 percent as against 9.92 percent in the previous auction held on August 6. The 10-year (7.16 percent) government bond yield is likely rise 10-15 bps from 8.15 percent, recorded on Thursday, traders said.

Banks which issue and subscribe certificate deposits may have to pay higher rate there. CD rates would quote higher than sovereign papers, guaranteed by the government with no chance of default.

On every auction, RBI declares a cut-off yield, above which auction participants are not allowed to quote.

Rupee slide

The Indian rupee dropped more than 7 percent to close at 60.88/USD on Thursday. Earlier, the RBI had issued a raft of measures to tighten liquidity in the market so that it creates demand for rupee-funds and thereby, bring stability in the rupee-dollar rate.

Past measures

In July this year, the central bank had raised the Marginal Standing Facility (MSF) rate by 100 basis points to 10.25 percent. MSF is one type of RBI window wherein banks can borrow overnight. Later, the RBI capped banks' borrowing to 0.50 percent of individual total deposits (or net demand and time liability as it is known in banking parlance). That essentially meant, banks would be able to borrow around 32,000 crore in total from the repo window at 7.25 percent.

Besides, it had put curbs on gold imports while conducting open market operations of government bonds.

saikat.das@network18online.com

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